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When it comes to navigating the complex world of commercial real estate transactions, having a solid plan is essential. That’s why I created this Commercial Real Estate Due Diligence Checklist, designed to streamline the due diligence process for everyone involved in acquiring commercial real estate.
If you’re a real estate investor evaluating your next big opportunity, or a developer planning a new project, or a broker facilitating the deal, then this checklist is your go-to resource. It’s also invaluable for attorneys ensuring all legal aspects are in order, property managers maintaining compliance, and financial advisors analyzing the numbers.
Download Checklist PDF or Google Doc
Disclaimer – This checklist is for informational purposes only. This checklist should not be used as a substitute to a customized document for your specific needs. Please work with your local professionals to make sure your due diligence is covering all the needed areas.
Commercial Property Due Diligence Checklist Sample
To make it even more convenient, I’ve made this resource available in PDF, Excel, and Google Sheets formats. Whether you’re double-checking zoning laws, assessing financial records, or preparing for smooth closings, the commercial real estate due diligence process becomes far more manageable with this tool by your side.
| Task Category | Sub-Tasks | Check |
|---|---|---|
| Property Information | Gather property address, size, zoning classification, and current use documentation. | [ ] |
| Verify property legal boundaries against public records and survey documents. | [ ] | |
| Collect property history, including prior ownership and development changes. | [ ] | |
| Title and Ownership | Confirm ownership by obtaining and reviewing the property’s Title Report. | [ ] |
| Check for liens, encumbrances, easements, or back taxes on the title. | [ ] | |
| Verify legal authority of the seller to transfer ownership. | [ ] | |
| Obtain title insurance to protect against defects. | [ ] | |
| Financial Records | Collect income statements and analyze cash flow from past 3-5 years, if applicable. | [ ] |
| Review lease agreements and ensure tenant compliance. | [ ] | |
| Confirm operating expenses including property management fees, repairs, and maintenance costs. | [ ] | |
| Verify tenant security deposits and their allocation. | [ ] | |
| Compare rent rolls with actual tenant leases to confirm accuracy. | [ ] | |
| Legal Compliance | Cross-check property use compliance with local zoning laws and regulations. | [ ] |
| Verify building permits and certificates of occupancy for the property. | [ ] | |
| Investigate any past or ongoing lawsuits, pending fines, or legal claims related to the property. | [ ] | |
| Confirm compliance with the Americans with Disabilities Act (ADA). | [ ] | |
| Assess if the property violates parking, noise, or signage ordinances. | [ ] | |
| Physical Inspection | Conduct a full building condition assessment (roof, foundation, windows, structure). | [ ] |
| Test systems like plumbing, HVAC, electrical, elevators, and fire alarms for proper functioning. | [ ] | |
| Engage professionals for pest inspection and mold assessment. | [ ] | |
| Check for areas needing immediate repairs or deferred maintenance. | [ ] | |
| Examine parking lots, landscaping, and exterior features. | [ ] | |
| Environmental Assessment | Perform Phase I Environmental Site Assessment to identify contamination risks. | [ ] |
| If necessary, proceed to Phase II testing (soil, groundwater sampling, etc.). | [ ] | |
| Check compliance with environmental safety laws (e.g., hazardous waste storage). | [ ] | |
| Assess potential risks such as flooding, soils report, or earthquake zones. | [ ] | |
| Identify the presence of asbestos, radon, or lead-based paint. | [ ] | |
| Review any prior environmental remediation work completed on the property. | [ ] | |
| Market Analysis | Analyze comparable sales and property performance in the local area. | [ ] |
| Evaluate competitive properties and neighborhood trends. | [ ] | |
| Research demand for property type in the market (commercial, retail, etc.). | [ ] | |
| Insurance and Risk Management | Review current property insurance policies for coverage details. | [ ] |
| Confirm the claim history of the property, including past damages. | [ ] | |
| Assess risks such as fire, vandalism, or theft unique to the area. | [ ] | |
| Evaluate liability coverage for tenants and property owners. | [ ] | |
| Tax Records | Obtain and analyze the property tax records for the past 3-5 years. | [ ] |
| Identify any pending property tax reassessments. | [ ] | |
| Verify if there are tax incentives, credits, or abatements associated with the property. | [ ] | |
| Survey and Site Plan | Order or verify professional property boundary surveys. | [ ] |
| Identify encroachments, right-of-way access, or easements on the property. | [ ] | |
| Review elevations and any site-specific geographic concerns (flood zones, drainage). | [ ] | |
| Permits and Licenses | Verify all operational permits, including zoning and building permits. | [ ] |
| Ensure compliance for business licenses (if part of the property’s operations). | [ ] | |
| Obtain or review historical records of completed construction permits. | [ ] | |
| Utilities and Services | Review agreements with utility providers and confirm service costs. | [ ] |
| Identify current utility usage data and energy efficiency. | [ ] | |
| Verify property access to necessary water, electricity, gas, and internet services. | [ ] | |
| Legal and Compliance Sub-Tasks | Confirm legal description matches public records and documents provided. | [ ] |
| Investigate potential special assessments or past due fees to government entities. | [ ] | |
| Research ADA lawsuits filed against the property. | [ ] | |
| Operational Details | Review existing service contracts (landscaping, cleaning, security). | [ ] |
| Evaluate property manager and audit historical property management practices. | [ ] | |
| Verify vendor service history and interview contractors if needed. | [ ] | |
| Comprehensive Management | Create a detailed due diligence timeline and assign tasks. | [ ] |
| Maintain a central repository for all diligence documents. | [ ] | |
| Use a project manager or real-time tracking tool to oversee progress. | [ ] | |
| Final Steps | Schedule a pre-closing property walkthrough. | [ ] |
| Ensure outstanding items (repairs, agreements) are resolved. | [ ] | |
| Confirm all documentation is complete and properly signed. | [ ] |
This comprehensive checklist dives deep into the critical elements of the due diligence period, guiding you to evaluate everything from environmental reports to loan documents. It’s particularly helpful for corporate real estate departments managing assets, lenders assessing risk during the financing process, and consultants like environmental specialists and civil engineers reviewing the physical and regulatory aspects of a property.
Due Diligence Process Timeline
The due diligence process for commercial real estate typically takes 30 to 90 days depending on the property’s size, complexity, and any legal or financial complications. Proper planning is essential to ensure all steps are completed within the due diligence period.
Below is a detailed timeline breaking down tasks into logical phases. Each task includes an estimated time allocation and specific recommendations using the provided keywords.
| Phase | Tasks and Sub-Tasks | Timeframe | Recommendations |
|---|---|---|---|
| Pre-Due Diligence (Planning) | – Develop a preliminary checklist for required documents and assessments. | 1 week | Use the preliminary checklist to organize the process efficiently. |
| – Assign roles for deal management (e.g., legal counsel, inspectors, advisors). | Ensure clear communication between stakeholders for real time visibility throughout the process. | ||
| – Research zoning laws, zoning regulations, and zoning restrictions for future property use. | Contact local agencies for quick query resolution. | ||
| Week 1-2 (Document Collection & Review) | – Obtain due diligence documents such as loan terms, payment history, and lease agreements. | 1-2 weeks | Request detailed records early to address delays. |
| – Collect records for utility bills, aged receivables report, and operating expenses. | Use these documents to assess operating costs and tenant payment reliability. | ||
| – Engage legal counsel to review legal documents, including title records, easements, and agreements. | Check for unusual terms or risk factors such as liens or disputes. | ||
| – Investigate government notices, litigation history, and other past legal issues involving the property. | Compile these into the property dossier for review. | ||
| – Conduct a comprehensive assessment of existing insurance policies and liabilities. | Confirm adequacy of coverage for potential risks. | ||
| Week 2-3 (Property Inspections) | – Hire a licensed property inspector to evaluate structural, electrical, HVAC, and as-built conditions. | 1-2 weeks | Document all findings and compare them with as-built plans. |
| – Review compliance with ADA, building codes, and identify code violations. | Address violations proactively. | ||
| – Conduct environmental reviews for issues like hazardous materials, lead-based paint, or contamination. | Follow recommendations from site consultants and specialized reports. | ||
| – Plan a thorough examination of the property’s physical condition, including parking and landscaping. | Compile photographic evidence to highlight areas of concern. | ||
| Week 3-4 (Operational & Financial Analysis) | – Review tenant leases, rent rolls, payment history, and tenant security deposits. | 1 week | Confirm accuracy of tenant-provided records and spot disparities. |
| – Analyze current income, expenses, and tax records. | Use results to determine financial health and project future potential. | ||
| – Evaluate personal property such as equipment or fixtures included in the sale. | Ensure condition and functionality meet expected standards. | ||
| – Crosscheck any material correspondence or pending agreements impacting the property (e.g., disputes, repairs). | Follow up on unresolved contracts or settlement issues. | ||
| Week 4-5 (Risk Assessment & Final Documentation) | – Investigate potential liabilities like tenant disputes or property damages from prior claims. | 1 week | Use findings to adjust purchase terms if necessary. |
| – Consult with financial advisors for a loan review and analysis of financing options. | Assess whether financing terms align with your investment goals. | ||
| – Compile all findings into a centralized due diligence report. | Prioritize risks and costly issues for renegotiation with the seller. | ||
| Week 5-6 (Final Steps) | – Schedule a pre-closing walkthrough to inspect repairs, if any. | 1 week | Use this opportunity to confirm completion of conditions in the agreement. |
| – Have all stakeholders review the finalized due diligence phase documents. | Ensure accuracy and completeness before closing. |
Tips for Success
- Allotted Time Buffers – Build an extra 1-2 weeks into your timeline in case unforeseen issues arise.
- Track Record Due Diligence – Evaluate the property seller’s history and track record for dealing with similar sales.
- Avoid Costly Mistakes – Address any red flags (e.g., outdated insurance or hidden legal disputes) promptly to avoid long-term expenses.
- Site Consultants Collaboration – Use professional site consultants to assess zoning compliance and environmental risks proactively.
Real World Professional Example of Thorough Due Diligence
How the FDIC Assesses Commercial Real Estate Asset Quality
Check out the specific details at their website -> FDIC Examination Policies Manual.
When evaluating commercial real estate assets, the FDIC conducts a comprehensive due diligence process to ensure asset quality and mitigate risks. This involves a thorough examination of pending claims, environmental issues, and the overall condition of properties such as apartment and office buildings.
The FDIC’s approach includes a complete due diligence review of underwriting standards, credit administration practices, and the adequacy of loan and lease loss reserves. Prospective buyers should be aware that the FDIC’s evaluation also considers the diversification and quality of loan portfolios, as well as the management’s ability to handle problem assets effectively.
This rigorous process reflects how our government ensures financial institutions maintain strong asset quality. A helpful fact to note is that the FDIC’s asset quality ratings range from 1 to 5, with 1 indicating minimal supervisory concern and 5 representing a critical threat to the institution’s viability.
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